Some more good news out earlier this week for this group:
- Mr. Lee told clients in a note that Canpotex – a potash exporter wholly owned by Saskatchewan potash producers, Agrium Inc., The Mosaic Company, and Potash Corporation of Saskatchewan Inc., – has announced potash prices in Brazil will increase by $50 to $360 per tonne effective Dec. 1, 2007.
- In Southeast Asia, meanwhile, the price of potash is set to increase immediately by $30 to $360 per tonne.
- And even better for Potash investors, Mr. Lee doesn't expect the global price hikes to end there, saying there is room for significant increases in India and China as well.
- "On a delivered basis, potash prices in India and China are currently about $270 per tonne and $235 per tonne, respectively. Based on prices in Brazil and Southeast Asia, we believe there is room for potash prices in India and China to move significantly higher in 2008."
- Mr. Lee added that she feels her 2008 financial forecast for PotashCorp based on an average realized potash price of $208 per tonne appears to conservative. (I'd say!)
- He noted that a $10 per tonne increase in her average realized potash price assumption would result in a 20¢ bump in her 2008 earnings per share estimate and an approximately $4 to $5 increase in her price target.
Takeaway: The only stock of the 3 mentioned above the fund does not hold is Agrium (AGU), as it's a mix of fertilizer/retailing, but that stock has also been on an incredible run. I discussed the squeeze on prices in yesterday's posting on Potash - simple supply and demand, economics 101. Here we have the results -> 10% increases in Asia immediately and by year end 15% increases in Brazil. Now the drawback is one of the biggest markets for fertilizer is the US and with the demolition of the value of the dollar this will hurt from a currency perspective on any sales to the US but the rest of the world looks like it will more than make that up.
So current consensus for Potash is $3.97 in 2008 - the analyst in the story mentioned every $10 increase in price adds $0.20 in EPS bump, so $30 = $0.60. The market is really putting a premium valuation on Potash right now, valuing each dollar of 2007 earnings with a 30 PE ratio. So from that standpoint $0.60 more EPS x 30 = $18 more in share price just from these price increases alone.
Looking at Mosaic (MOS), the street only values 2007 earnings at 19x (Mosaic has less growth potential/expansion versus Potash), however we can reasonably expect the $2.94 in 2008 estimates (listed as year end May 2009), to go up in scale as well.
It is very hard to put a good valuation on these companies - obviously fertilizer does not traditionally sell as such premiums, but we are not in a traditional time either. I hate to use words like "it's different this time" but with 20-30% of the world's population migrating to urban centers - its going to be different for a while. If these stocks are over or undervalued is hard to call, but if you felt the valuation of the companies was accurate pre-pricing change, this price increase alone means you need to push the stock price targets up as earnings will increase.
I will be looking to add on these names on any sizeable market pullbacks, and am kicking myself for selling off any I had at much more attractive prices in early/mid August.
2 PM EDIT: My research staff (uhhh, being me) missed the fact that there was an analyst upgrade today on Mosaic as well.
- Shares of Mosaic Co., which makes phosphate and potash crop nutrients, rose in Friday morning trading, after a Citi Investment Research analyst upgraded the stock on stable pricing of a main fertilizer ingredient.
- Citi's Brian Yu raised his rating on Mosaic to "Hold" from "Sell" and lifted his price target to $48 from $31.
- Yu said the price of diammonium phosphate, a main ingredient in fertilizer, is unlikely to decline, as long as Mosaic can maintain its market position and production.
- Yu hiked his fiscal 2008 earnings per share estimate to $2.78 from $2.27, and 2009 estimate to $2.69 from $2.05.
Long Mosaic, Potash in fund; no personal positions
